The End of Cheap Labor in China

Rising wages are sending its manufacturing jobs to Cambodia, Vietnam, India — and the U.S.

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Photograph by Stefen Chow for TIME

A worker at Guangzhou Fortunique, where wages are up 50%

On May 25, U.S. businessman Charles Hubbs made the short trek to Hong Kong from his office just outside Guangzhou, a city in Guangdong province in southeastern China that is known for good reason as the manufacturing workshop of the world. For the 64-year-old native of Louisiana, it was a trip that may have marked the beginning of the end of his successful 22-year run as a China-based exporter of medical supplies.

Hubbs was going to listen to a pitch from the American ambassador in Cambodia, Carol Rodley, and the president of the American Chamber of Commerce in Phnom Penh. Their aim was simple: to get foreign investors, particularly those already with operations in China, to consider setting up shop in Cambodia. Hubbs was all ears. To hear him tell it, the price of labor is on the brink of making his firm, Guangzhou Fortunique, which supplies some of the U.S.'s biggest health care companies, uncompetitive. "We've seen our wage costs in China go up nearly 50% in the last two years alone," he says. "It's harder to keep workers on now, and it's more expensive to attract new ones. It's gotten to the point where I'm actively looking for alternatives. I think I'll be out of here entirely in a couple of years."

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He is not alone. In what is supposed to be a land of unlimited cheap labor — a nation of 1.3 billion people, whose extraordinary 20-year economic rise has been built first and foremost on the backs of low-priced workers — the game has changed. In the past decade, according to Helen Qiao, chief economist for Goldman Sachs in Hong Kong, real wages for manufacturing workers in China have grown nearly 12% per year. That's the result of an economy that's been growing by double digits annually for two decades, fueled domestically by a frenzied infrastructure and housing build-out — one that, for now anyway, continues apace — combined with what was for a time an almost unquenchable thirst for Chinese exports in the developed world. Add to that the fact that in the five largest manufacturing provinces, the Chinese government — worried about an ever widening gap between rich and poor — has raised the minimum wage 14% to 21% in the past year. To Harley Seyedin, president of the American Chamber of Commerce in South China, the conclusion is inescapable: "The era of cheap labor in China is over."

Mind you, that doesn't mean that labor costs in China, even in the most expensive parts of the country like Guangdong province, are higher than in most other places, particularly in the developed world. They aren't. The average manufacturing wage in China is still only about $3.10 an hour, (compared with $22.30 in the U.S.), though in the eastern part of the country, it's up to 50% more than that. The hourly cost advantage, while still significant, is shrinking rapidly. For the vast majority of companies, whether small, medium-size or huge multinationals, the decision about where to produce a product is always driven by multiple factors, of which the cost of labor is but one. "For lots of companies over the past two decades, the disparity was such that labor costs often drove the decision," says economist Daniel Rosen, the China director and principal of the Rhodium Group, a a New York City–based consulting firm. "Now, increasingly, that's no longer the case."

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The ripple effects of this new reality are enormous, and they flow globally. Start with China itself. The push for higher wages, constrained for so many years, sparked a series of high-profile labor protests last year. (Worker discontent was also reflected by 14 suicides at Foxconn, the large manufacturer that produces goods like the iPad.) But higher wages have also improved things in China's western region, where the government has long tried to encourage investment. In the past year, many multinational and Chinese companies have expanded or relocated inland, where labor is still cheap.

From China's perspective, that's exactly the sort of trade-off it seeks. As Andy Rothman, chief China macro strategist at CLSA Securities in Shanghai, says, "People in Sichuan or Henan or wherever can stay closer to home and find a good-paying job" instead of having to flood east each year to live in a company dormitory far away from their families. "How is this a bad thing?"

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